NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A-' rating to the Pennsylvania Turnpike Commission's (PTC) turnpike subordinate revenue bonds, Series 2011. In addition, Fitch affirms PTC's $2.9 billion outstanding senior lien turnpike revenue bonds at 'A+', and $3.1 billion outstanding subordinate lien turnpike revenue bonds at 'A-'. The subordinate bonds are being issued for the purpose of making payments to the Pennsylvania Dept. of Transportation (PennDOT) in accordance with Act 44 to fund certain grants to mass transit agencies and PennDOT capital.
The Rating Outlook on all bonds is Stable.
Route essentiality: PTC plays a vital role in serving the state's major population centers and benefits from a strategic location for commercial traffic, evidenced by its stable historical traffic and revenue growth.
Ratemaking flexibility: PTC benefits from economic ratemaking flexibility, and traffic has demonstrated relatively low elasticity through toll increases since 2005. Revenue has had an average annual growth rate of 6% from 1990-2010. However, there may be political risk associated with implementing higher toll rates in the event of lower traffic, higher costs, or increased debt service requirements.
High leverage but strong financial performance: PTC's leverage is currently approximately 12.5x (net debt to cash flow available for debt service [CFADS]) and is expected to remain at this elevated level for some time. Financial performance is expected to continue covering all operating and current capital needs of the existing mainline facilities with senior debt service coverage ratios at or above 2.0 times (x) and subordinate debt service coverage ratios at or above 1.3x. Fitch expects PTC to have sufficient excess cash flow to fund approximately 20% of annual mainline capital expenditure on a pay-go basis.
Prudent management policies: It is management's policy to maintain senior and subordinate debt service coverage ratio (DSCR) at 2.0x and 1.3x, respectively, regardless of traffic levels, and PTC's policy to meet Motor License Fund (MLF) debt service obligations at 1.2x times. As leverage continues to increase going forward, management will need to balance expense management and rate increases to continue to achieve these coverage targets.
Sizable capital program with growing debt burden: The need for an additional $6.4 billion in senior lien debt to fund the PTC's mainline capital improvement plan (CIP) for fiscal 2012 to 2021, and increasing leverage to subsidize highway and bridge projects across the commonwealth, as well as subsidize transit operations under Act 44, put pressure on the Pennsylvania Turnpike. However, Fitch views favorably the focus on mainline capital spending for reconstruction and renewal, somewhat mitigating deferred maintenance concerns.
KEY RATING DRIVERS:
-- Resilience of traffic levels, particularly commercial traffic, in the face of expanded obligations of the PTC and associated toll increases and to the extent there is a prolonged weak economic recovery.
-- Management's ability to control expenses and manage its sizable capital program while meeting acceptable debt service coverage levels on senior and subordinate lien bonds and subordinate lien MLF bonds.
-- Given the size and scope of the updated capital program for the next 10 years and beyond, the burden on the subordinate lien from continued Act 44 obligations could very well pressure debt service coverage ratios to a level requiring a rating change.
The senior revenue bonds are secured by revenues consisting of tolls, charges, fines and other revenues and income derived from vehicular use of the Turnpike, net of operating and maintenance expenses. The subordinate revenue bonds are secured by commission payments consisting of turnpike revenues after all obligations under the senior lien indenture have been satisfied.
PTC is issuing $126 million in subordinate revenue bonds and $100 million in MLF-enhanced special revenue bonds to fund Act 44 payments to PennDOT. Subordinate bonds will cover grants to mass transit agencies, while the MLF-enhanced bonds will cover certain road, highway, bridge and capital projects. The MLF-enhanced bonds are rated separately by Fitch's tax-supported group. Obligations are fixed rate, and will be issued on parity with existing bonds (subordinates with existing subordinates, MLF-enhanced with existing MLF-enhanced).
Since last review, PTC has expanded its capital program, accelerating capital initiatives to improve and maintain the Turnpike in a state of good repair, ensure customer safety and convenience, and address capacity constraints. The enhanced plan was adopted in June of 2011, adding $1.74 billion to the original capital program for a total of $6.4 billion over the 2012-2021 period. Beyond 2022, PTC's plan assumes capital expenses continue to increase by 4% per year to cover on-going capital needs to maintain the facility. This is reflected in the capital plan figures.
Compared to the previous plan adopted, the enhanced plan increases capital investment by 37% over the 10-year period. Largely because of this increase, PTC is projected to issue a total of $9.4 billion in debt between 2012 and 2021, or 27% more than envisaged under the previous plan. This includes $5.3 billion in senior revenue bonds, $2 billion in subordinate revenue bonds, and $2.1 billion in MLF-enhanced bonds. Despite the higher level of leverage, PTC intends to maintain debt service coverage above 2.0x for senior lien debt, 1.3x for subordinate lien debt, and 1.2x for MLF-enhanced debt. In addition, the plan anticipates maintaining annual liquidity levels of at least 10% of operating revenues.
While the current rating reflects the expectation that under any reasonable scenario senior lien debt service coverage would be robust, PTC's mission change from a self-supporting entity to one subsidizing state-wide functions and the associated lower levels of financial flexibility remain heightened risks. Given the significant increase in financial obligations and overall leverage, the PTC is now dependent upon regular toll increases for obligations outside of the preservation of the turnpike system; these increases are highly likely to be well above managements' original estimate of 3% per year. Under Fitch scenarios contemplating traffic growth below 2% annually, annual toll increases of 5% or higher may be required to maintain management's targeted coverage levels, a rate that could begin to depress traffic volumes and intensify negative political feedback. Fitch also notes under the recent Settlement Agreement, PennDOT and the Office of the Budget agreed that the amounts previously paid by the PTC for 2010-11, as required under Act 44, constituted full payment of the obligation and PTC will not be obligated to pay annual higher payments as previously mandated under Act 44.
PTC began implementing toll increases and revenue enhancements in 2009 to meet its annual obligations. The revenue increases aim to provide funds for payments under the Funding Agreement and other Act 44 purposes, including funding of the Commission's mainline capital expenditure program and normal operating expenditures. Future toll increases will be determined by the Commission, taking into account the amount necessary to meet the then existing debt and operational obligations of the Commission. In January 2009, a 25% toll increase went into effect on the mainline turnpike, followed by a further 3% increase in January 2010, and further increases in January 2011 (tolls increased 3% for EZPass customers and 10% for cash customers, rounded to the nearest $0.05). The 2011 increase was combined with an increase in annual fees for use of EZPass transponders (from $3 to $6 per transponder) and a downward adjustment of the commercial discount program to 5%, 10%, and 15% off of published toll rates. Most recently, PTC adopted a toll increase of 10% on cash tolls, effective Jan. 1, 2012; EZPass tolls will remain unchanged and commercial discount tiers will drop to 5% and 10%.
Final figures indicate that traffic increased 1.3% for FY 2011 (ending May 31), an increase over growth of 0.2% for FY 2010 and a decline of 1.8% in 2009. This corresponds to revenue increases of 6.6% in 2011, 12.7% in 2010 and 2.8% in 2009, respectively. As a result of these changes, the average cash toll equals 8.5 cents per mile, and the average EZPass toll is 8.0 cents per mile (versus 7.7 cents per mile after the 2010 increase). This reflects a full-length trip on the Turnpike Mainline, and is considered to be competitive with other major domestic, seasoned toll facilities. On a last 12 months basis through August 2011, PTC has had a 12-month total volume of 187.7 million total transactions, representing a 0.1% increase versus the same period a year prior. Revenues have grown 5.8% over the same period, showing resilience despite the 2009, 2010, and 2011 toll increases. However, for the last six months PTC has seen declining traffic on a year-over-year basis, indicating some softening of demand due to current economic conditions. It is unclear if this softening in demand indicates an inflection point for toll elasticity.
PTC has seen slightly improving senior debt service coverage levels since 2009, with coverage of 2.26x in 2009, 3.28x in 2010, and 3.55x in 2011 (senior and subordinate coverage was 2.1x, 1.95x, and 1.78x for 2009, 2010, and 2011, respectively). However, coverage is expected to be increasingly pressured as PTC addresses its need to manage existing obligations on the mainline facilities and capital projects contained in its updated 10-year capital program and obligations under Act 44. Operating and maintenance expenses contracted in 2011 by 0.3%, after growing by 5% and 1% in 2009 and 2010, respectively, and showing a considerable improvement in cost management over prior years. PTC also maintains a general reserve fund cash balance of $151.1 million for mainline activities. Since 2009 management has made efforts to contain costs, with continuing efforts for fiscal 2012. However, given the recent increase in the capital program and continuing obligations under Act 44, PTC will need to continue to both control expenses and increase revenues in order to meet its continually escalating annual debt obligations.
The Pennsylvania Turnpike is the nation's oldest turnpike. It serves Pennsylvania's mature economy, including the cities of Philadelphia and Pittsburgh, which anchor each end of the state. The turnpike also provides a strategic link in the system of turnpikes that stretches from Chicago to Boston. Not surprisingly, toll revenues benefit from a high proportion of commercial traffic. While this introduces some susceptibility of commercial revenues to economic cycles, the sizable boost to revenues in up-cycles softens the negative financial impact in down-cycles.
Copyright 2013 Nexstar Broadcasting, Inc. All rights reserved.